One of the most baffling developments of 2014 was the emergence (at least in social enterprise policy-world) of the ‘Profit-with-Purpose’ business.
For those who missed it, the ‘Profit-with-Purpose’ business is an idea primarily championed by social entrepreneur support provider, Unltd, to explain their support ‘for-profit’ businesses (companies limited-by-shares) dedicated to fulfilling a social mission.
Unltd ceo, Cliff Prior, chaired the Mission Alignment Working Group (MAWG) of G8 Social Impact Investment Taskforce and their report explains the idea at length.
Prior also explains the idea (to some extent) in this interview with Pioneers Post, where he responds to criticism from Unltd’s former partners in Scotland, Can and Senscot, who ended their relationship with the storming assertion: “UnLtd has developed into one of the UK’s leading advocates against the regulation of social enterprise and for the inclusion of private profit companies in the sector.”
While I understand that many readers are experts in the minutiae of social enterprise policy debates present and past, less firmly embedded readers may appreciate some explanation of the terrain on which this battle is being fought.
Very roughly, it’s this (from the MAWG report, p18): “From a legal point of view, the main difference between profit-with-purpose business and social or solidarity enterprise is the degree of flexibility regarding the distribution of profits and use of assets.”
What, in a UK context, is the nature of the inflexibility that Unltd are railing against?
Umbrella body, Social Enterprise UK, state that in order to be considered a social enterprise (for the purposes of membership): “the majority (more than 50%) of an organisation’s profits should be reinvested to further its social or environmental mission.”
That’s a pretty flexible definition, even without creative interpretation, it enables a company to pay 49.9% of its profits out to private investors and retain the other 50.1% in the company ever year if appropriate.
When it comes to assets, SEUK’s position is: “We believe that an asset-lock can be effective in ensuring that a social enterprise operates in the wider interests of society for perpetuity and is not at risk of sale. But we recognise that many social enterprises receive no public funds or assets. Some have benefited from considerable personal investment on the part of the entrepreneur and need the money back.”
So the official social enterprise position on profits and assets – to the extent that there is one – is that a social enterprise can distribute half its profits to private investors and doesn’t need to have any sort of asset lock (as long it can bear the ignominy of failing to pursue an approach that SEUK believes can be effective).
Elvis and Kresse, the business used in the Pioneers Post article as an example of a ‘profit-with-purpose’ business is (entitled to call itself) a social enterprise (if it wants to) by the SEUK’s definition.
That said, there’s absolutely no reason why a socially-minded entrepreneur should sign-up to SEUK’s commitments if they don’t want to. In that situation, they can start an ethical business like Ecotricity or Lush, that does business in the open market using a conventional ‘for-profit’ structure – attracting ethically-minded customers on the basis of the way they do business rather than their corporate set-up.
In the UK context, a ‘profit-for-purpose’ apparently fills the gap between social enterprises and ethical businesses. Look carefully. Can you see it yet?
Profit can be good
Despite, this deeply inauspicious premise, Prior and the Unltd team are neither bad nor stupid people so there must be some reasons why they’ve ended up on this bizarre wild goose chase.
There’s at least one good one, based on what are (whether or not you agree with them), honorable principles. In a recent discussion on social media, Dan Lehner, formerly Head of Ventures at Unltd and now working at CLS social enterprise/profit-for-purpose business, Oomph!, explained his support for the thinking that mutated in ‘profit-for-purpose’: “My biggest reason to push the issue is because I think there’s need for a new level of awareness-raising (partially with consumers/government and funders/investors but mostly with really talented, imaginative, ambitious entrepreneurs) that it’s ok to make money out of social purpose – if social outcomes are genuinely achieved and evidenced.”
Why shouldn’t people who want to earn a decent living, provide well for themselves and their families and make the world a better place in the process be encouraged to do so? It’s difficult to imagine many of us in social enterprise world offering any suggestions as to why not (although some of might argue that that’s often possible using a social enterprise structure, too).
Why should, Unltd, a charity set-up to support ‘social entrepreneurs’ (rather than ‘social enterprises) support those people? Senscot and Can, amongst others, clearly do have some suggestions but others of us are pretty relaxed about that, too – School for Social Entrepreneurs is another example of an organisation that supports ‘social entrepreneurs’ without specifying the type of organisation they have to work for or set-up.
Two bald men lose will to live during ethically-produced comb brawl
The less principled driver of ‘profit-for-purpose’ is as one skirmish in the distastefully absurd scrap over the £400million worth of ‘unclaimed assets’ allocated for investment in ‘Social Sector Organisations’ via the government’s semi-detached social investment wholesale finance institution, Big Society Capital.
The starting point is that: “The statute under which BSC was established defines third sector (or social sector) organisations as those that ‘exist wholly or mainly to provide benefits for society or the environment’. BSC has interpreted this to include regulated social sector organisations such as charities, Community Interest Companies or Community Benefit Societies as well as some profit-making companies or enterprises that have a clear social mission where these entities can meet the specific criteria set out in the attached Governance Agreement.”
The ‘Governance Agreement’ definition combines the clarity of wool with the flexibility of nylon to deliver a set of criteria that virtually any business could meet if it could be bothered.
It states that: “the payout of cumulative profit after tax to shareholders will be capped at 50% over time” but doesn’t specify how much time so, presumably, as long as time (or your business) doesn’t stop you can pay as much profit out to private shareholders as you like on the basis that you’re firmly intending to start the process of reinvesting the majority of overall profit generated over the lifetime of the business at some as-yet-undefined point.
Big Society Capital’s view (as I understand it) is that a key reason why the social investment market didn’t really get going in 2013/14 was that social investors were spooked by this potentially confusing situation.
In August 2013, BSC ceo Nick O’Donohoe stated: “We need to more clearly segment the social impact investment market and also define more specifically what should count as a social enterprise.” and that: “That definition, in my view, will need to be driven by a specific legal form or golden share which guarantees a lock on social mission and also allows capital providers to earn a reasonable return consistent with the risks they are taking.”
‘Profit-with-Purpose’ clarifies that situation so that, in the words of MAWG report, p19, there is: “a way for social investors to identify eligible profit-with-purpose businesses with confidence and familiarity.”
In a UK context, this means a way for social investment intermediaries to investment UK citizens’ unclaimed assets in businesses that are not ‘regulated social sector organisations’.
Few within either civil society or social investment world disagree with the idea that if government is going to provide money for a social investment and (tax relief for it) it should provide a regulated registration system for those eligible to receive it (particularly if their social mission is not already regulated in some other way).
My strong expectation is that vast majority of organisation who could be bothered to register would meet SEUK’s definition of a social enterprise. For Unltd, the idea that might be a few that might not but would be keen to receive ‘social investment’ is apparently justification for the creation of ‘A New Sector’.
The more worthwhile stuff that’s ignored
BSC’s money is a relatively small, specific chunk of cash set aside to support ‘Social Sector Organisations’. The parochial battle over whether (or which) private companies should be eligible to receive it ignores the far bigger and more interesting discussion about the promotion of social purposeful activity in the private sector.
Dan Lehner’s point that: ‘it’s ok to make money out of social purpose – if social outcomes are genuinely achieved and evidenced‘ – is an important one but the last thing it suggests is the need for the creation of ‘A New Sector’ of businesses for a bemused public to attempt to get their head around.
Whether we’re using the term ‘social investment’ or ‘impact investment’ there’s huge potential investors to invest in companies and customers to buy products based on the social good generate by those activities. This is not necessarily about companies demonstrating their impact through SROI, it could be about being Living Wage Employers, using sustainable materials or demonstrating their support for their local community.
If what the company does with its profits and assets doesn’t matter, then why else should an investor be interested in what it is as opposed to what to what it does? If an investor is investing what an organisation does, social requirements can be just as usefully written into an investment agreement as written into a company’s mem and arts. If a social entrepreneur running a private business doesn’t what their social mission distorted by an investor, they should get that mission written into the deal.
Shoving the good stuff done in the private sector into the cul-de-sac of ‘Profit-for-Purpose’ businesses serves no one other than a support organisation struggling to explain what it does, and some social investment organisations struggling to do what they’re meant to do.